Punters turn to greener pastures

Posted On Tuesday, 04 September 2007 02:00 Published by eProp Commercial Property News
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The latest round of results from listed property funds confirm that the sector has more than delivered on its earnings growth promises

Angelique de RauvilleVacancies are down and rentals are up, which has helped the likes of Hyprop, ApexHi, Redefine, Resilient and SA Corporate report growth in income payouts of more than 17% over the past few weeks.
      
But more encouraging is that the prices of property stocks have been surprisingly resilient amid the global equity sell-off and sub-prime credit fears: listed property in south Africa is down 3% since mid-July compared to the Alsi's drop of 8,5%. 

Nevertheless, it seems some property analysts are no longer as bullish as they were six months ago, particularly on the earnings growth front. Even the management of some of the bigger property funds - notably Growthpoint CEO Norbert Sasse and SA Corporate CEO Craig Ewin - have indicated that current (super) growth levels aren't sustainable.
 
Sasse says Growthpoint is aiming for distribution growth "significantly" above inflation in 2007/2008 but there's no way that the 14,5% distribution growth declared to end-June this year will be repeated.

Sasse sites limited upside from filling vacancies (already at a record low 2,5%), reduced scope to refinance older, more expensive debt and the upward interest rate cycle as reasons for the expected slowdown.

Stanlib property analyst Evan Jankelo-witz agrees with Sasse that investors will have to temper their distribution growth expectations. "Property fundamentals are still solid but don't expect to see the same fireworks going forward."  Jankelowitz says the spectacular earnings growth figures reported by some funds have been (artificially) inflated by one-off occurrences, such as mergers and acquisitions. Says Jankelowitz: "Business has been brilliant. But most funds have already squeezed their property portfolios for all they're worth."

It seems that short-term punters have already turned elsewhere in search of better gains. Investec Listed Property Investments CEO Angelique de Rauville says most speculators were flushed out when the market dipped in May/June last year. She maintains that's one of the reasons why the sector has been more resilient than general equities in recent weeks. "Most property investors today are buying the three- to five-year story and are prepared to sit out any short-term volatility."
De Rauville says although distribution growth may slow somewhat, property is still likely to outperform equities over the next five years in terms of total returns.

Macquarie First South Securities property analyst Leon Allison's forecast is more muted. He expects a 9% total return (income and capital growth) for the property sector over the next 12 months - less than a third of the 30% return achieved over the past 12 months. Allison says although global market volatility has had a limited effect on the property sector so far, some caution is necessary. 

"It's difficult to predict whether the sector's relatively defensive performance of the past month will continue over the short term. We have seen with previous equity market sell-offs that listed property can also be as volatile and weak as the market in the short run."

The message from analysts seems clear: stock selection is now the name of the game.

De Rauville favours funds that will outperform in terms of earnings growth - mostly smaller cap stocks, such as Premium and Octodec (in the Wapnick family stable) and Diversified (in Des de Beer's Resilient group). Bigger funds, including Growthpoint, ApexHi and Redefine, are on De Rauville's radar, as she believes the share prices of those counters should be underpinned by the expected inflow of foreign investment.
 
Jankelowitz says the quality of management becomes more crucial as growth slows. He's overweight in blue chip stocks, such as Madison-managed Hyprop, Resilient and Acucap. Jankelowitz also likes industrial-focused funds, including Capital and Pangbourne.
 
Allison's current stock-picks include RMB-managed Emira, ApexHi (A and B), Hospitality (B), Vukile, Acucap and SA Corporate. Old Mutual-managed SA Corporate looks relatively cheap compared to most of its peers. Investors can now buy the stock at a one-year forward yield of around 9% - 100 basis points higher than the sector's 8% average. 

Allison expects a total one-year return of 16% for SA Corporate but concedes that there's some risk in his forecast, given that SA Corporate is effectively a new fund with no real track record. "Given the substantial corporate activity and change in the fund, management probably needs some time to bed down and sweat the new assets."

SA Corporate has grown dramatically in size. Its market cap is now reaching for R8bn, up three-fold from R2,5bn a year ago. But the fund has also completely reinvented itself in terms of sector and geographical spread following the recent merger with sister fund SA Retail and a number of other major acquisitions. It's gone from being a rather drab, industrial-focused fund based primarily in KwaZulu-Natal (in its former Martprop guise) to become a fully diversified national player, currently ranking as the sector's third biggest fund after Growthpoint and ApexHi.

SA Corporate CEO Craig Ewin says the fund has now reached the size where it could be attractive to international investors. Less than 1% of its stock is currently in foreign hands. That could increase noticeably over the next few months, depending on how successful management is in attracting the interest of overseas fund managers. SA Corporate will be participating in two international real estate investment conferences to be held next month in London and New York.

Last modified on Wednesday, 23 April 2014 13:46

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